Howard Marks is the founder and co-chairman of Oaktree capital management and they manage funds of around US$100 billion for their investors. He is also the author of the book ‘the most important thing’ which is one of mine best book with lot of investment insight. After reading Marks book, in a nutshell, there are seven key lessons for all the investors in the Indian market.

  1. The attractiveness of buying something for less than it’s worth makes a lot of sense. So how can one find bargains in this efficient market? You must bring exceptional analytical ability, insight or foresight. But because it is exceptional, few people have it.

There are few stocks that are trading at discount, but we still believe HCL Tech from the IT space is trading at steep discount. Our view is against the herd but we believe in our analytical skills.

  1. You need to know accurate estimate intrinsic value of the business for steady foundation, unemotional and potentially profitable investing. There are three important things you need to know to stay profitable while markets are declining; you have to have a view on intrinsic value, and you have to believe in that view strong enough to be able to hang in and buy even as prices of those stock declines suggesting you are wrong. And finally you need to be right.

kitex garment logoThe valuations of Kitex Garment had changed after its second quarter results and uncertainty which prevails after Trump’s victory in the US election. What price many might had bought looks expensive as the buy price is now out of the estimate intrinsic value band of the company (2018 intrinsic value band for Kitex Garment is Rs 317 – Rs 429). So what price it is trading today is within the estimate intrinsic value band and you need to believe in those estimates and adjust your positions.

  1. Investment market follow a pendulum – like swing:
  • Between euphoria and depression
  • Between celebrating positive developments and obsessing over negatives; and
  • Between under-priced and overpriced.

Understand these swings, and always remember that investor’s psychology seems to spend a lot of its time at extreme than it does at a “happy mediums”.

All stocks follow pendulum like swing. Then whether its commodity or the IT sector or the banking sector. They all go through those swings and if you want to make money then stay away from herd (extremes).

  1. There are two concepts that we can hold to with confidence:
  • Rule number one: most things will prove to be cyclical.
  • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one. ( a good example today would be IT sector of India)

Cycles are self – correcting, and their reversals is not necessarily dependent on specific factors. They reverse because trends create the reason for their own reversal. Thus, I like to say success carries with itself the seeds of failure, and failure the seeds of success.

hclThe best example to share here will be again Kitex Garments and HCL Tech or Eicher Motors. If you believe in your estimate valuation spectrum then you will buy all the 3 stocks today. You also have to believe in the cycle of euphoria and depression for the IT sector and there are seeds of success in Kitex Garments today failure.

  1. Understand risk and it is most important for investors. It’s also ephemeral and unmeasurable. All this makes it hard to recognise, especially when emotions are running high.

The road to long – term investment success runs through risk control more than through aggressiveness. Over a full career, most investors results will determined by how many losers they have, and how bad they are, than by the greatness of their winners. Skilful risk control is the mark of superior investor.

We have shared with you in detail about how to manage risk in your portfolio in the series of sizing of stocks in your portfolio in detail.

  1. Oaktree’s preference for defence is clear. In good times, we feel it’s okay if we just keep up with the indices (and in best of times we may even lag a bit)… Oaktree’s portfolios are set up to out-perform in bad times and that’s when we think out-performance is essential. Clearly if we can keep up in good times and outperform in bad times, we will have above average results over full cycles with below average volatility.

As Oaktree we also do our best to outperform during high volatility and declining market. From 21st Sept 2016, NIFTY 500 index had fallen by 7.24% and our portfolio is down by 0.24%. Check your portfolios for the same time frame, if they had outperformed then you don’t need to worry about the risk management because you are the good risk controller.

  1. One of the most important thing to remember is that economics is not an exact science. It may not even be much of science at all, in the sense that in science, controlled experiments can be conducted, past results can be replicated with confidence, and cause-and-effect relationships can be depended on to hold.

Stock investments are completely different science is best explained again in my favourite book ‘The (Mis) behaviour of markets: A fractal view of Risk, Ruin and Reward’ by B Mandelbrot and Richard Hudson.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.